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Common Pitfalls of Commercial Leases

 

How Commercial Tenants Can Protect Themselves

When it comes to renting space for your business, location is key. Whether your business thrives or fails depends largely on where you choose to initially operate your business. What many business owners fail to realize, however, is that the terms of your commercial lease are just as important as the location. Before a business owner enters into a commercial lease, it is important to understand how commercial leases are different from their residential counterparts. It is also useful to take a look at some standard commercial lease terms and what they mean for your business.

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Commercial Leases Are Different from Residential Leases

If you are a long-time apartment-dweller or you’re simply familiar with residential leases, it is important to recognize that commercial leases are far different from residential lease agreements. Whereas most residential leases are for short terms – typically for one year – commercial leases tend to include much longer terms, with some commercial lease contracts spanning several years. With so much money tied up in a single lease agreement, you could find yourself in a financial bind if you need to end your relationship with your commercial landlord before the expiration of your lease.

Additionally, commercial leases also offer none of the consumer protection guarantees of residential leases. However, commercial leases generally offer a tenant much more leverage, flexibility, and negotiating power than a residential lease. Commercial landlords want to rent their space to a profitable business – they know they have a better chance of receiving their rent if your business succeeds. Hence, commercial landlords are generally more inclined to negotiate lease terms with their tenants and offer concessions to draw the right commercial tenant to their location.

Important Commercial Lease Terms

When it comes to commercial lease agreements, boilerplate legal documents are rarely a good solution. Your business is unique; your legal documents should be unique as well. There are, however, several standard provisions that generally appear in every commercial lease. Knowing what these terms mean will help you feel more confident when it is time to negotiate your own commercial lease agreement.

Use Provisions

You have probably seen a busy intersection with two or more gas stations sitting directly across the street from one other. This is an example of business “clustering”, which is something certain types of businesses do in an attempt to capture a larger portion of a specific market share. Clustering is not a good idea for all types of business, and it might spell disaster for yours. For example, a small mom-and-pop pizza shop is unlikely to last long if a major fast food pizza chain moves in right next door. Use provisions within commercial leases are designed to prevent these scenarios from happening. They define how the tenant intends to use the premises as well as limit the types of tenants permitted to occupy adjoining spaces.

Property and Facility Maintenance

When drafting a commercial lease for your business, it is critically important to define which party is responsible for maintaining the building and its interior. Although it may seem obvious that a landlord is in charge of repairing things like broken HVAC systems and leaking roofs, other items aren’t so clear-cut. What happens when a tenant conducts an extensive build-out? If a tenant bears the cost of new carpeting, shelving, and electrical wiring, is the landlord still obligated to fix these items if something fails? What if the tenant installs new signage? Who is responsible for repair costs pays for broken neon in one of the sign’s letters? These are all items that have the potential to create serious and costly conflicts if not addressed in the commercial lease agreement.

Personal Guaranties

Commercial landlords commonly require a commercial tenant to provide a personal guarantee in the lease. If you have organized your business as a corporation, this completely obviates the personal liability protection of your corporate business entity and exposes personal assets, like your home, to your landlord and your other creditors should you default on a commercial lease. If the business defaults on the lease, the owners can be personally liable for all the damages incurred to the commercial landlord for the entire term of the lease—including the commercial landlord’s attorneys’ fees, costs and defenses.   An owner should be careful in agreeing to provide a personal guarantee unless absolutely necessary or negotiate limitations to the potential damages the commercial landlord can obtain if a default occurs.

Landlord’s Breach and Default

Occasionally, a commercial landlord will end an agreement before the end of the lease term.  This can seriously disrupt a business and interrupt a business owner’s income stream as he or she scrambles to find new space and bears the cost of relocating and advertising a new location.  Tenants can protect themselves by including generous grace periods in their lease agreements and requiring landlords to mitigate any tenant damages incurred as a result of the landlord’s breach.

© 2014 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved

This website has been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.